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  • Writer's pictureRobert Baharian

This one chart...Bonds - the ultimate predictor

They say the bond markets, rather that the stock markets, are a better guide to the future. For decades, the bond market has done a far better job than the stock market in predicting economic downturns.

Mid 2019, the bond market sent investors a signal. Yield on the 10 year US Treasury (the mid/long end of the curve), fell below the 3 month rate (the shorter end of the curve) - meaning, the bond market is expecting things to get worse. Much worse. This inversion has been on the money over the last four decades, as can be seen in the chart below. Each and every time the 10 year minus the 3 month rate fell below zero, the US fell into recession.

What investors are ignoring at the moment is something else the bond market has been doing following an inversion and recession. And that is, higher rates. We saw this in 1989, 2002, and 2007. If history is any guide, could we see rates rising quicker than we had originally thought?

Personally, I think we'll see a much slower grid upward. A sharp vertical rise from here just doesn't make any sense to me right now - especially given the current economic uncertainty. Then again, the bond market is looking way, way ahead of today.


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